The BullionBuzz eNewsletter - June 8, 2010

“Central banks create fiat money, denigrate gold, and try to convince the people that the money they print is wealth.  That’s the great lie behind fiat money.”

--Richard Russell

CHART OF THE WEEK

www.bloomberg.com/apps/news?pid=20601109&sid=aa0cI64Gx.4E&pos=15

The CHART OF THE WEEK tracks US gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund.

VIDEO OF THE WEEK

Money, Banking and the Federal Reserve

GOLD

Gold is a Great Safety Net if Things go Wrong

Tom Stevenson

In these uncertain times, strong cases can be made for and against most investments, but it is hard to argue against anyone holding at least some gold in their portfolio as an insurance policy against things going badly wrong. Against this backdrop, Stevenson keeps coming back to the one investment that has always acted as a safe haven at moments of crisis. Today, the macroeconomic and geopolitical backdrop for gold could hardly be more supportive. From the troubles afflicting the Eurozone to the fight against inflation in emerging markets; from the real or threatened conflict in Korea, Thailand and Israel to the environmental disaster in the Gulf of Mexico, the watchword for investors is capital preservation. Gold's time has come again, and there are several reasons to expect the price of bullion to continue rising. For one thing, gold tends to outperform when the real, inflation-adjusted Fed Funds rate is below 2%, as it is now and will be, according to the Fed, for an extended period. Supply and demand is also supportive of the gold price. For the first time in years, central banks the world over are becoming buyers, rather than sellers, of the yellow metal. Production costs are another reason to believe that gold’s price is well-supported. Over the long term, gold has held its own in inflation-adjusted price terms, but there have been significant cyclical swings over time. Today's price, although a nominal high, is considerably below the peak hit at the time of the late-1970s crisis in real terms. That point represented a bubble, and no one should base an investment strategy on the expectation that a similar price surge will happen. But a small investment in gold ensures that if history did repeat itself, you wouldn't end up kicking yourself.

www.telegraph.co.uk/finance/comment/7805529/Gold-is-a-great-safety-net-if-things-go-wrong.html

What Will Happen to Gold Supply if Demand is Very High?

Julian Phillips

Investment demand for gold has never been so high and it is likely to rise still further. Normally when a commodity is in high demand, supply is accelerated and holders of that commodity often take profits, thereby increasing supply. Economic history tells us the same: rising prices and high demand should result in rising supply. When it comes to gold, however, all rules have to be re-written, because gold is part commodity, part money. Currently, newly mined gold supply is falling. Easily mined deposits of gold have been exhausted, and rich gold deposits are rare and increasingly difficult to mine. Steep tax levies also deter new investment. The result is that gold mining companies are hard pressed to replace exhausted resources, and newly mined gold production is set to decline irrespective of the gold price. Central banks sales of gold have dried up, and in their place have come central bank purchases of some 400 tonnes per year. Meanwhile, investors have accepted the current record price levels as being sustainable and demand has begun to rise again. It is clear that demand is at a high, without the usual froth. A combination of peak demand and restricted supply leaves only one potential source of supply – current holders of gold, who bought solely to make an eventual profit. These can be termed ‘weak holders.’ Long-term gold investors – central banks, institutions, individuals – hold gold to preserve wealth in a world where it is threatened. They hold gold to be prudent in the face of uncertainty and instability in the financial world. They may only hold a small proportion of their portfolios in gold, but you can be sure they won’t sell until certainty and stability return to the financial world. A quick look at what’s going on now in that world says that won’t be for some time.

http://financialsense.com/editorials/phillips/2010/0604.html

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Thursday June 17, 2010
11:15 am -12:15 pm ET

with Nick Barisheff and Paul Desousa

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MONEY

Against the Gods

Richard Russell

The world is rushing into US dollars, which it is treating as a safe haven. Russell, however, views all sovereign fiat currency as questionable and he blames the world disaster currently under way on the widespread creation of fiat money. Once bankers realized they could control the money of nations, they realized they could control nations. Russell views central banks and fiat money as “against the gods.” Central banks create fiat, denigrate gold and try to convince the people that printed money is wealth. That’s the great lie behind fiat, he writes. One facet of this bear market represents the beginning of the end of fiat; no man and no organization can create wealth with the click of a mouse. That is the great immoral fraud underlying this bear market. Smart investors who know and understand history are well aware of the fraud of fiat money, which is why there is a bull market in intrinsic wealth today. Other investors cannot understand why gold is selling at historic highs in terms of various fiat currencies. Russell views the developing primary bear market as a great moral drama. It is the market’s answer to humans’ greed and their ability to brain wash fellow citizens. The gigantic fiat house of cards is slowly coming undone. Wealth is created by brains and hard work; to create wealth by fiat money is fraudulent and against humanity and the gods. Great bear markets invariably uncover great crimes, says Russell; this primary bear market will be of historic, earth-shaking proportions.

www.321gold.com/editorials/russell/russell052610.html

INVESTMENT

Buffett: Derivatives Still a Ticking Time Bomb

Annie Lowrey

During the recent Financial Crisis Inquiry Commission in Washington, Brooksley Born, the former head of the Commodity Futures Trading Commission, asked Warren Buffett about derivatives (contracts derived from the price of another asset), which will come under new regulation once the financial regulatory reform bill passes. Derivatives trading accounts for up to 40% of revenue at some Wall Street banks, and their regulation is the subject of intense lobbying by financial firms that do not want to have to exchange-trade derivatives, or put trades through clearing houses. Born quoted Buffett’s shareholder letters that declared derivatives were “financial weapons of mass destruction, carrying dangers that while now latent are potentially lethal” and “time bombs both for the parties that deal in them and the economic system.” In response, Buffett said that derivatives “accentuated enormously the leverage in the system” and contributed to the financial collapse. He described his acquisition of reinsurance company GenRe, which came with 23,000 derivatives contracts, and how he sold off all of them for $400 million, willing to take the loss because he felt he could not understand them. “It was impossible,” he said, noting he had never heard of most of the counterparties and “couldn’t pronounce their names.” “The only answer was to get out of the business,” he said. When asked whether major investment banks, such as JPMorgan Chase, have the capacity to understand their derivatives contracts and the associated risks, Buffet replied, “I think they’re dangerous. I’ll say this: I don’t think I could manage them. … It’s hard for me to imagine a regulatory system that could supervise something like that.” Finally Born asked if Buffett thought the derivatives market was still a ticking time bomb. “I would say so,” said Buffett.

http://washingtonindependent.com/86176/buffett-derivatives-still-a-ticking-time-bomb

ECONOMY

Key Indicators of a New Depression

Neeraj Chaudhary

It may appear that the US government has successfully navigated the economy through recession and growth has returned. But Chaudhary believes the US economy is badly damaged, and a modern-day depression has begun. The first indication is America’s unemployment situation. According to the government's own data, the median duration of unemployment is now over five months (and rising), the highest it's been since the BLS started compiling this statistic in 1965. About 40 million people - or one out of every eight Americans - are receiving food stamps in what the author calls “Great Depression II”. At the height of the first Great Depression, the rate was just one out of thirty-five Americans. Despite tax credits, housing is in just as bad shape. During the Great Depression, home prices dropped some 15% from their pre-depression peak. In Great Depression II, housing is down at least 30% from the pre-depression peak, with some markets down more than 50%. There is tremendous incentive to just walk away, with potentially disastrous consequences for America’s social fabric. Even more worrisome, the present drop in home prices is against a backdrop of price inflation. From jobs to food to houses, the current period of economic turmoil is at least as bad as the Great Depression, whether or not the media wishes to acknowledge it. The main difference is that the US dollar is the world's reserve currency now, so problems can be kicked down the road. During the Great Depression, the US was on the gold standard, which forced it to live within its means. This, in turn, made it easier to see that the economy was in decline and changes had to be made. Unfortunately, Great Depression II could develop into something far more devastating than its predecessor: a hyperinflationary depression. As bad as the current downturn has been, inflation would make it drastically worse. There must be an honest accounting of the problems currently facing the U S in order to avert disaster.

www.321gold.com/editorials/chaudhary/chaudhary060410.html

REAL ESTATE

Surge in Foreclosures is Predicted

Harold Bubil

America’s real estate horror story is about to get worse; Realty Trac Senior Vice-President Rick Sharga says that another wave of toxic loan foreclosures is about to rock the market. It will be as bad as the peak of the subprime mortgage foreclosure spike in the winter of 2007-2008. By the fall of 2012, foreclosures will have returned to a normal level, making for six years of real estate hell in the US. Resetting option-ARM mortgages, along with alternate-A and subprime loans given to borrowers with bad credit, will make up the bulk of the foreclosures. The difference this time is that these defaults will be driven by unemployment, and hot spots across the US include Idaho, Arkansas, California, Florida, Arizona and Nevada. Currently, strategic defaults, in which homeowners simply decide to walk away from delinquent loans, make up about one in eight mortgage defaults. Unfortunately more and more homeowners will eventually decide this is the only way out as their option ARMs reset at much higher interest rates. Sharga also noted that loan-modification programs, touted as a solution by some, will be ineffective in resolving these types of foreclosure problems. Realty Trac charts show 2005 was a normal year, with about 800,000 total US foreclosure filings. That number has climbed steadily since then, with a projected 4.3 trillion in 2010.

www.heraldtribune.com/article/20100606/COLUMNIST/6061000/2107/BUSINESS?p=all&tc=pgall